Special Purpose Acquisition Corporations (SPACs) on the TSX
February 27, 2009
The Toronto Stock Exchange (TSX) has adopted rules that will permit special purpose acquisition corporations (SPACs) to be listed on the TSX. The new rules became effective on December 19, 2008. The final rules are embodied in amendments to Part X of the TSX Company Manual. The proposed rules and the final rules were reported on, respectively, in Volume 3:4 of McCarthy Tétrault Co-Counsel: Business Law Quarterly and in our e-Alert.
A SPAC is a public shell company, created and led by an experienced management team that raises equity in an initial public offering (IPO) to acquire an operating business.
In order to create a SPAC and complete an offering on the TSX, a SPAC must file a listing statement with the TSX and clear its IPO prospectus with Canadian securities regulators. The SPAC must raise a minimum of $30 million (through the issuance of common shares or units) at a minimum offering price of $2 per security. If units are issued, each unit of the SPAC may consist of one common share and up to two common share purchase warrants.
A minimum of 90 per cent of the proceeds of the offering raised in a SPAC IPO must be placed in escrow to be held for a qualifying acquisition. In addition, 50 per cent of the underwriters’ commission on the IPO must be placed in escrow and may be released to the underwriters only upon a qualifying transaction. The securities offered must provide for conversion and liquidation distribution rights. If a SPAC does not complete an acquisition in the allotted time from the date of its IPO (i.e., within 36 months of the IPO), the funds held in trust must be returned to the securityholders pursuant to the liquidation distribution rights. The conversion right entitles a securityholder to convert its securities to cash if it votes against approval of the qualifying transaction. The SPAC may impose additional conditions for a qualifying transaction to proceed, including a maximum percentage of securityholders exercising conversion rights.
The TSX expects that the equity interest to the founding securityholders will be in the range of 10 per cent to 20 per cent of the SPAC’s equity upon completion of the IPO. Founding securityholders are not entitled to participate in the liquidation or conversion features. The pricing of the initial interest to be acquired by the founding securityholders may be less than the IPO price. The TSX indicated that it "expects that the founding securityholders and underwriters will negotiate a commercially reasonable level of equity interest held by the founding securityholders, failing which a successful marketing of the IPO would be unlikely."
The SPAC may, prior to the IPO, enter non-binding agreements with respect to a potential qualifying acquisition, including confidentiality agreements and non-binding letters of intent.
Once a SPAC has completed its initial public offering, it must complete an acquisition within 36 months from its IPO. The qualifying acquisition must have a fair market value equal to at least 80 per cent of a SPAC’s net assets; however, the SPAC may use debt to finance the acquisition. The qualifying acquisition must be approved by a majority of the SPAC’s directors who are unrelated to the qualifying transaction, and also by a majority of the votes cast by securityholders present at a meeting, excluding the founding securityholders. The SPAC’s information circular for the securityholders’ meeting must be approved by the TSX, and the SPAC must clear a further prospectus with Canadian securities regulators containing disclosure regarding the qualifying acquisition.
Upon completion of an acquisition, the SPAC must meet the TSX standard continued listing requirements.
Where escrow is applicable to an issuer listing on the TSX by completing a qualifying acquisition with a SPAC, 10% of the founding securities (rather than 25 percent as required for non-SPACs) will be released at the date of closing of the qualifying acquisition. The remainder of the founding securities will be released over the following 18 months. Securities other than the founding securities will be subject to the regular escrow requirements and release schedule, where applicable.
The TSX has published Staff Notice 2008-0007, which provides additional guidance including a summary of the key prospectus disclosure requirements and other operational issues that may arise for SPACs. In the SPAC IPO prospectus, issuers should disclose the valuation methods they intend to use in valuing the qualifying acquisition, particularly if the IPO prospectus discloses that a qualifying acquisition will be in a certain sector such that the method of valuation may be known in advance. In the prospectus assuming completion of a qualifying acquisition, issuers should disclose whether a valuation took place. If so, issuers should disclose whether it was independent and the method used to value the qualifying acquisition. If there was no valuation, issuers should disclose how the consideration paid for the qualifying acquisition was determined.
The TSX expects information circulars prepared for qualifying acquisitions to wrap around the prospectus assuming completion of the qualifying acquisition, thus reducing duplicative or unnecessary work by issuers and their advisors, and ensuring the consistency of the disclosure in the information circular and the prospectus.